Sharing The Wealth – Minimising CGT and IHT

by Readers Question

9:21 AM, 24th February 2014
About 7 years ago

Sharing The Wealth – Minimising CGT and IHT

Make Text Bigger
Sharing The Wealth – Minimising CGT and IHT

I am exploring ways to share the wealth and minimise CGT and IHT

I hold a profitable portfolio of some 18 investment properties… Sharing The Wealth - Minimising CGT and IHT

More than half were purchased in 1997.

Most have appreciated in capital value. Sharing The Wealth - Minimising CGT and IHT

The rental stream gives a net profit in excess of £75,000 pa

About two years ago I purchased a residential property using an interest only BTL mortgage

The property is let to my son and his wife on an AST.

They effectively pay the Mortgage…

However in the books we receive an economic market rent from them….

I pay them back the difference between mortgage and the market rent as a monthly payment to top up their cash flow.

I refurbished the property prior to renting, spending in excess of £100,000.

The money spent was allowed by my accountant mainly as revenue expense and as such has not increased the book value of the property for CGT purposes.

The revenue expense is being offset against the significant rental income….

I funded the deposit of some 40%.

The property has appreciated in value significantly beyond the purchase price PLUS refurbishment costs by another £100,000 – yes the property is in London.

My plan was to sell the property to my son and his wife after the initial two year fixed period when there is no penalty for Redemption. The selling price would be the purchase price plus a notional increase within our CGT Allowance.

The actual amount we would receive net being the redemption cost of the BTL mortgage…

Are you still with me?

So I am in fact gifting the deposit, plus the refurbishment costs, plus the significant increase in property value…

Lucky Lad???

Yes but being ‘his father’s son’, he has asked whether there is a better way…???

1. To avoid SDLT…

2. Can I gift the property to them?

3. Can they then loan me the money to effectively repay the BTL loan?

Thus having a significant charge on my estate upon my demise…

Other factors

I am currently married.

Possibility of a divorce in near future.

The portfolio including the property in question is owned in equal share.

I would like to tidy this up before any separation or divorce proceedings are started.

Quite a complex scenario….

Views , opinions and FACTS would be welcomed.

Many thanks

Alexus Reading

Comments

Mark Alexander

9:50 AM, 24th February 2014
About 7 years ago

Hi Alex

This is one of those instances where I think well intentioned advice via a forum could be very dangerous.

Do you employ the services of a fully qualified and insured tax accountant who specialises in adbising landlords? If you do than please go and see them immediately and tell them what you atre thinking. If your accountant isn't a specialist in this area please see >>> http://www.property118.com/landlord-tax/

There is a massive difference between tax avoidance (which can be perfectly legal if structured property) and tax evasion (which you could end up being fined for or even imprisoned). Sadly, the schemes you have suggested appear to be far more akin to tax evasion to me. Ignorance of the law is not an acceptable defence either.

If you sell your property to your son for less that it is really worth this needs to be disclosed to HMRC and they will tax you based on their assessment of the market value for capital gains tax purposes. If you gift the property, or a significant proportion of its value, to your son the disposal will also trigger CGT based on the open market value of the gift.

Your potential divorce adds yet another who layer of complications to this.

There are other options including selling some or all of your properties, but do beware of CGT if you do this, or remortgaging them so that you and your wife have significant cash reserves to negotiate your divorce settlement with. If you still wish to do so you can then gift your son some cash which will be a Potentially Exempt Transfer (P.E.T" for tax purposes and completely tax free if you live for another seven years.

Ideally your tax advisers will have a legal department which is also familiar with portfolio landlords divorce scenario's and working closely with divorce lawyers.

I appreciate that you might think you are the first person to have ever considered the ideas you have documented in your Readers Questions article but I can assure you that you are not. A little tax knowledge can be far more dangerous that none at all.

Please, please, PLEASE take professional advice.
.

Thiru Vasagam

10:23 AM, 24th February 2014
About 7 years ago

I will just add another point to Mark's comment which are all very valid.

Please do a comprehensive Tax Planning taking into account of your short term & long term objectives; that will help you have clarity in whatever the decision you would make.

Terence Joseph

12:18 PM, 24th February 2014
About 7 years ago

I think that you may find that the £100,000 refurbishment costs were not allowable against revenue as this work was carried out before you rented the property. The purchase price would have reflected the need for initial refurbishment though the costs may be offset against the capital gain.

Good luck

Mark Alexander

13:20 PM, 24th February 2014
About 7 years ago

Reply to the comment left by "Terence Joseph" at "24/02/2014 - 12:18":

I share your concerns, hence my worries about the advice that Alexus has been receiving to date.
.

Michael Barnes

1:59 AM, 25th February 2014
About 7 years ago

Reply to the comment left by "Terence Joseph" at "24/02/2014 - 12:18":

My understanding (I have no professional qualifications to back this up) is:

If the property was fit to be let without the refurbishment, then the refurbishment cost is allowed as revenue.
If the property was not fit to be let without the refurbishment, then the refurbishment cost is capital.

Provided that the refurbishment consisted of repairs/replacements (before this tax year)/decorations to the same quality and function as before. If there is improvement (e.g. in quality) or addition of something not previously there, then it is Capital.


Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

BECOME A MEMBER

Post Covid Staycation boom could be taxing